When the Smoke Clears
Capital Thinking • Issue #758 • View online
Amazon in 2014 was a puzzle. It was big. It was growing. It had market share and mindshare. Competitors feared it as much as customers loved it.
What it didn’t have was a good business.
Last Man Standing
Profit margins wobbled between negligible and negative. That might be acceptable for a young startup, but Amazon was two decades old at the time. The whole thing was easy to mock and call a bubble.
Jeff Bezos had a different view: Margins don’t matter. Dollars do. A huge business with low margins was preferable to the opposite.
He explained in 2014:
Margins are not one of the things we are seeking to optimize. It’s the absolute dollar free cash flow per share that you want to maximize.Free cash flow [is] something that investors can spend. Investors can’t spend percentage margins … What matters always is dollar margins: the actual dollar amount. Companies are valued not on their margins, but on how many dollars they actually make.
There are parts to quibble with here, but I just liked Bezos’s simple logic: The business with the most dollars wins. Not the best margins or the highest quarterly growth. Just how many dollars you generate over the long run.
Let me propose the equivalent for individual investors. It might push you away trying to earn the highest returns because returns, like margins, don’t matter; generating wealth does.
Everything worthwhile in investing comes from compounding. Compounding is the whole secret sauce, the rocket fuel, that creates fortunes.
And compounding is just returns leveraged with time.
Earning a 20% return in one year is neat. Doing it for three years is cool. Earning 20% per year for 30 years creates something so extraordinary it’s hard to fathom.
Time is the investing factor that separates, “Hey, nice work,” from “Wait, what? Are you serious?”
The time component of compounding is why 99% of Warren Buffett’s net worth came after his 50th birthday, and 97% came after he turned 65.
Yes, he’s a good investor.
But a lot of people are good investors.
Buffett’s secret is that he’s been a good investor for 80 years. His secret is time. Most investing secrets are.
Bezos’s goal isn’t to have the best business. It’s to make the most dollars.
Likewise, investors’ goals shouldn’t be the best annual returns. It should be to maximize wealth.
And you get that through endurance – not to be the best in any given year, but to be the last man standing.
Photo credit: Daniel Eledut on Unsplash